Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-55

1959-1 C.B. 94

Sec. 421

Caution: Clarified by Rev. Rul. 61-219

IRS Headnote

Where an optionee of a restricted stock option does not accept an invitation of the corporation to surrender his option in the hope of receiving a new option at a more favorable price, but retains his old option with no change in its terms, there is no modification of his option within the meaning of section 421(e) of the Internal Revenue Code of 1954. New options issued at the more favorable price will qualify as restricted options provided they comply with the provisions of section 421 of the Code.

Full Text

Rev. Rul. 59-55

Advice has been requested whether, under the circumstances below, the issuance of new stock options under a restricted option plan will cause unexercised options previously issued under the plan to be modified within the meaning of section 421(e) of the Internal Revenue Code of 1954.

The shareholders of a corporation in 1954 adopted a stock option plan the terms of which complied with the requirements of section 421 of the Code. In 1957, after an extended period during which the market price of the corporation's stock was below the price stated in the outstanding options, the corporation proposed the issuance of new options under the plan. To make available a sufficient number of shares of stock for this proposed issuance of new options, the corporation invited holders of outstanding, unexercised options to surrender those options to the corporation. The terms of the invitation to surrender were that optionholders who accepted would then, and only then, be considered along with other employees as recipients of new options. It was emphasized in this invitation that optionholders who accepted had no legal right, by virtue of their surrender of old options, to receive new options. Consequently, holders of old options who did not accept the invitation to surrender and thereby the reconsidered, retained their old options the terms of which remained unchanged.

Section 421(e)(2) of the Code, in part, defines the term `modification' to mean any change in the terms of the option which gives an employee additional benefits under the option. This same definition is contained in section 1.421-4(c)(1) of the Income Tax Regulations.

Accordingly, it is held that where an optionee of a restricted stock option does not accept an invitation of the corporation to surrender his option in the hope of receiving a new option at a more favorable price, but retains his old option with no change in its terms, there is no modification of his option for the purpose of section 421(e) of the Code. New options issued at the more favorable price will qualify as restricted stock options provided that they comply with the provisions of section 421 of the Code.